January 4, 2013

THE PROBLEM WAS UNTRUSTWORTHY LENDERS, NOT UNCREDITWORTHY BORROWERS:

Subprime mortgages may have been the most lucrative bet of 2012 for hedge funds, with some gaining more than 20% by buying up troubled financial crisis era mortgages.

That's a bet that's been paying off handsomely since 2010, according to Bloomberg Hedge Fund Indices.

"It's been an unusually attractive time to invest in the mortgage market," said Steve Kuhn, head of Pine River Capital Management's $3.5 billion fixed income fund. [...]

Pine River Capital Management is a prime example of how those bets paid off. Its fixed income fund gave investors a 35% return in 2012 by making bets on banks and lenders that helped underwater borrowers restructure their subprime mortgages.

"There had been an idea that almost anyone with negative equity in their home would default," said Kuhn. "Borrowers have behaved better, and there have been fewer defaults than people had thought."